MC EXCLUSIVE MC Interview | Trump tariff impact not so much on growth but on jobs: EAC-PM Chairman

S. Mahendra Dev.(Image Courtesy: @CsdHyderabad/x)

The impact of high US tariffs will be less on growth, but more on potential job losses as some micro, small, and medium enterprises (MSMEs) will be affected due to ‘adverse impact’ (of duties) on labour-intensive goods, S Mahendra Dev, Chairman of Economic Advisory Council to the Prime Minister (EAC-PM) told Moneycontrol during an exclusive interview.

However, Dev added exports make up for around 20% of India’s GDP. "Indian economy is, therefore, primarily driven by domestic consumption and investment and less by exports. Some adverse impact due to US tariffs is expected on near term growth," he added. India’s GDP is projected to grow at 6.5 percent during FY26, according to the Reserve Bank of India (RBI).

The government is in touch with stakeholders to mitigate the adverse impact, particularly on small businesses, Mahendra Dev said, and is taking ‘counter-balancing measures’ like GST reforms to encourage domestic consumption.

The EAC-PM Chairman added that ease of business and deregulation should be the most crucial among next-generation reforms. "We have to do much more on deregulation to improve economic growth," Dev said, adding that the 1991 reforms focused on product markets, and now maybe the right time to look at factor market reforms like land and labour.

Dev saw the S&P Global’s upgrade of India’s sovereign rating as enabling domestic companies to raise resources abroad at lower effective cost and attract FDI due to improved investor confidence. In 2023, India’s share in Global FDI stood at 2.1 percent, according to a United Nations Conference on Trade and Development (UNCTAD) report.

Edited Excerpts:

Q: The government’s priority is to undertake next-gen economic reforms. What, in your view, should be the defining features of India’s next generation of economic reforms?

A: The government has undertaken several major reforms like IBC, GST, RERA, reforms in FDI, insurance sector etc. in the last 11 years. India is aspiring to attain developed country status in terms of per capita income by 2047. The next generation reforms should be in tune with the goals of 2047. Structural transformation from agriculture to industry and services is needed as agriculture still has 46% of the total workers. Manufacturing and services are complementary and therefore, both need push for higher output and employment.

First, ease of doing business and deregulation should be the most important next generation reform. Some reforms have been undertaken. We have to do much more on deregulation to improve economic growth. The deregulation commission will look into this issue and make recommendations.

Second, 1991 reforms focused on product markets. Now it may be the right time to look at factor market reforms like land and labour.

Third, there is also a need for more push to disinvestment and privatisation. Government is already doing this for IDBI. Fourth, agriculture needs market reforms. In all these next-generation reforms, states have to play an important role. Lastly, state capacity has to be improved further particularly at state level for better implementation.

Q. On the role of the task force. The Prime Minister has spoken of a task force to chart out reforms. What specific areas – such as taxation, labour, or agriculture – are being prioritised, and how is the EAC-PM feeding into this process?

A: Task force is likely to cover the whole economy and look into current rules, laws, policies and procedures, to align with the vision of Viksit Bharat by 2047. The aim is to reduce the compliance costs for domestic business and for exports. Prime Minister already announced Deep Water Exploration Mission for finding oil and gas reserves, National Critical Mission for self-reliance in critical rare earth and other minerals. National manufacturing mission will examine how to strengthen manufacturing including MSMEs. EAC-PM will do whatever is needed by the government on these issues.

Q. So far, why have been slow in carrying out reforms linked to ease of doing business (EODB)? Is the thinking now to carry these reforms quickly?

A: Reforms on ease of doing business are a continuous process. The government has so far abolished 40000 unnecessary compliances and also scrapped over 1500 obsolete laws in the last 11 years. The recent Income Tax Act also abolished more than 280 sections. The government wants to quickly accelerate the deregulation agenda already underway in the last ten years to achieve higher medium- and long-term growth and to compete at global level. These reforms will make business easier and life simpler for citizens.

Q. MSMEs often cite compliance burden as a key hurdle to growth. What kind of regulatory and procedural changes do you think are most urgently needed to ease their operations, and is there a blueprint in the works?

A: Central government recognises the critical role of MSMEs in raising economic growth, employment generation, and exports. The government has taken several initiatives over the last decade to support and promote the growth of MSMEs. These efforts focused on improving access to credit, raising technological capabilities, providing market linkages, and addressing structural challenges MSMEs face. However, while these initiatives have helped MSMEs, some challenges in the regulatory environment remain. For example, regulatory compliance burden holds back formalisation and affects employment growth, adversely impact innovation, and reduce growth. There is a tendency for firms in India to remain small due to regulations. The cost of business increases. The deregulation commission and Task Force are also likely to look into the regulatory issues of MSMEs.

Q. In the backdrop of high tariffs from US, what should be the approach for our exporters? Should they look at other external markets, or cater to domestic demand?

A: Diversification of export markets in the near future is important for the exporters. Free trade agreements (FTAs) will be done with European Union and other countries. A new focused export thrust is needed for labour intensive goods. There is a huge potential market in Asia. Most of the demand for these goods come from this region. Similarly, there will be demand from countries in Latin America and Africa. Some argue that India should join Regional Comprehensive Economic Partnership (RCEP) or Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Government weighs in costs and benefits for India in joining these regional groups. Exporters can also cater to the domestic demand as India has huge market for several goods. Government is also encouraging self-reliance for many of the goods and services. Therefore, exporters can follow twin-demand approach of diversifying external markets and cater to the domestic demand.

Q. How will the high tariffs from US affect growth this year? How long could the pain last for? And how should India protect its small businesses from the tariffs’ impact?

A: Exports constitute only around 20% of GDP. Indian economy is, therefore, primarily driven by domestic consumption and investment and less by exports. Some adverse impact due to US tariffs is expected on near term growth. However, the impact will be less on growth and more on potential job losses as some MSMEs will be affected due to adverse impact on labour intensive goods such as textiles, garments, gems and jewellery, leather goods etc.

Government is in touch with stakeholders to take care of this adverse impact particularly on small businesses. The government is taking counterbalancing measures such as GST reforms to promote domestic consumption. Although there are headwinds like uncertainties of geo-political and tariffs at global level, there are many domestic tailwinds such as low inflation, rate cuts and CRR cut by RBI, expected good monsoon, trade diversion to India, measures in the last budget like rising capital expenditure, tax reduction etc. These tailwinds may raise both rural and urban demand by raising both investment, consumption and some push to exports. Hopefully, the twin-demand approach of diversifying markets and meeting domestic demand will help small labour-intensive businesses.

Q. The Central government’s proposed GST rates’ revamp would result in revenue loss for states. How should they be compensated? Should the compensation cess be re-imposed for a certain period on some luxury items to benefit the states?

A: There have been demands to reduce the number of GST rates since it was introduced in 2017. The Prime Minister has announced GST reforms on 15th August. The proposed new GST rates may lead to revenue loss for states. On the issue of compensation to states, GST council is going to meet in the first week of September and may discuss on the recommendations of the groups of ministers such as rates, ease of compliance and compensation.

Q. Why should the states in the first place agree for the Centre’s GST proposals? How will the GST rate rejig impact growth this fiscal year?

A: The decisions on GST are taken by the GST Council and it has representation of 31 Sates and Union territories including Delhi, Puducherry and Jammu & Kashmir. Therefore, the GST reforms on rates by the Council are the joint decisions of the states and the centre. The reduction in GST rates after changes in rates will also lead to higher consumption and higher growth. An SBI Research report estimates an estimated consumption boost of Rs 5.5 lakh crore due to income tax rate cut and the proposed GST reforms. Additional GST revenue is estimated to be around Rs 52,000 crore, that could be equally divided between Centre and States. The total increase in aggregate demand due to GST reforms is Rs 1.98 lakh crore and this amounts to a 0.6% increase in GDP.

Q. The Finance Ministry has estimated the revenue neutral rate (RNR) may fall below 10 percent, if the Central government’s proposals are accepted by the GST Council. Given the government’s focus on fiscal consolidation, is a low suitable, and for how long?

A: Yes, the revenue neutral rate may fall below 10% after restructuring the rates. It may not have much impact on fiscal consolidation of the government. The revenue loss is likely to be more than compensated by the potential revenue gain post the GST rate restructuring. The SBI report estimates minimal or non-existent impact on fiscal deficit. The government is likely to stick to the target of 4.4% of fiscal deficit in FY26.

Q. Labour law changes have often been cited as unfinished business of reforms – do you see concrete steps being taken soon to implement the labour codes and make India’s labour market more flexible?

A: It is known that there is a need for structural transformation from agriculture to industry and services particularly in terms of employment. On manufacturing, among other things, the small size of the firms - with the majority operating at less than 10 workers - is a major problem. Many others are between 10 to 50 workers. On the other end, we have large scale manufacturing firms. The missing middle is a problem. We must have many more middle level manufacturing units with 200 to 500 workers. There is an observed tendency for firms in India to remain small. By staying small, firms lose access to institutional capital, skilled talent, and technology infusion and they are outside formal supply chains. There is a feeling that we need to quickly introduce labour reforms which can remove the missing middle problem. This can raise productivity and growth significantly. Labour flexibility has to be done at state level. A state level analysis mentioned in the Economic Survey 2024-25 indicates that industrial progress is better in the states where business reforms were undertaken.

Q. How does the S&P Global’s upgrade of India’s sovereign bonds affect foreign portfolio inflows? Will there be any significant impact in the inflows?

A: S&P Global’s upgrade for India is a positive development for the Indian economy. This upgrade highlights India’s robust and sustained economic growth, driven by high infrastructure investment, sound fiscal management, and a strengthened monetary policy framework that keeps inflation under control. It reflects India’s rising global stature and the government’s steadfast commitment to long-term prosperity. It says that US tariffs will have a marginal impact and not derail India’s long-term growth prospects. S&P forecasts India’s real GDP growth at 6.5% in FY26 and annual GDP growth of 6.8% in the next three years.

There are two opportunities for India. First, it enables domestic corporates to raise resources abroad at lower effective cost. Second, it attracts FDI because of increasing investor confidence. The confidence also increases as funds can be repatriated without hassles. The emerging markets may attract FDI in the coming years, and hopefully, India’s share in FDI will rise over time. The FDI inflows for India have increased by 14% in FY25, although there was a moderation in net FDI. It is known that there was net outward FDI and a rise in repatriation. Exits and repatriation are part of the process and indicate a sign of mature market. Higher gross FDI also indicates that India continues to remain an attractive investment destination.